The key is high saving.
Here’s an amazing story about a worker on Wall Street making $40,000 a year and saving $10,500 a year in a 401(k) for 12 years. By the end, he was a millionaire.
Sam Dogen went to extremes to save that much money in such a short time. And I don’t condone his stealing food from his employer, although that “theft” [he puts it in quotation marks and so I don’t know if it was really theft] saved him only a small amount of money.
But what I always take from such stories is that if you really start to focus on what you spend and make some careful decisions, you can save a lot. Let’s say, for example, that you really do want your own room and you split a one-bedroom with a friend, paying $1,300 a month (remember that this was in 2000) rather than splitting a studio and paying $900 a month, your annual saving would have been about $4,500. (I’m also taking into account the reduced tax advantage from saving less in a 401(k)).
Here’s my version of what Sam did. Living in high-tax New York state in 1975-76 and making $20,000 gross at the University of Rochester over 12 months, I saved $9,300.
READER COMMENTS
Steve S
Oct 20 2019 at 11:52am
I don’t disagree with the message (I save 20+% of a decent salary in pre/post tax accounts).
But Financial Samurai posts are always somewhat misleading or lacking key details. In the article he said he would have $150K after 10 years at the savings rate on a $40K salary. But if he lasted 10 years in finance he was likely making $200K+ easily by the end, so him “ending up a millionaire” is not inevitable.
A person who makes $40K with 3% /year raises and saving 10K per year would need closer to 30 years, not 10, to be a millionaire.
Thaomas
Oct 20 2019 at 2:24pm
Our tax system ought to incentivize saving with partial tax credits so long as we have income taxation. If we had a progressive consumption tax it would work through partial credits for savings ~ unlimited 401 K’s.
Alan Goldhammer
Oct 20 2019 at 6:45pm
David – your comments are quite misleading. I read the linked article and it’s only clear what his starting salary in 2000 was. It does not discuss salaries in subsequent years and whether he earned any bonuses as most Wall Street folks do. This guy was an investment banker with an MBA. It’s exceedingly doubtful that his salary was $40K for the full 12 years. We also don’t know what his 401(k) was invested in and given the term of his employment covered the financial meltdown, he might not have made 7% annual return (and certainly he would not end up with $1M from his retirement fund and couldn’t take it out without a tax penalty). He also did not have a wife and children and led rather a spartan lifestyle. This is a very incomplete story!!!
During the same time you were at Rochester, I was at Cornell on a $13K/year NIH post-doctoral fellowship. Housing costs were low and I shared a 2 BR apartment with a roommate. If I remember correctly, I was saving about $3500 or so per year.
David Henderson
Oct 20 2019 at 10:42pm
Alan,
Yes, I don’t know how he got to a million.
What I found impressive was that he saved $10K a year. Your story was impressive too.
Alan Goldhammer
Oct 21 2019 at 11:12am
Annie Lowery just has an article up over at The Atlantic on how a couple making $350K/year are considered middle class in San Francisco. Within it is a reference to a Sam Dongen blog with this couple’s budget. It’s easy to see how the money gets eaten up. I don’t envy young couples trying to make it these days. It seems as though we had some much better choices when we started our family 38 years ago.
David Henderson
Oct 21 2019 at 11:19am
Re middle class in SF, let me guess (I don’t have time to read it right now): Housing prices. What you had to some extent, and I had to a slightly lesser extent when house buying is a property rights environment in which there were many fewer restrictions on building.
Jon Murphy
Oct 21 2019 at 11:52am
I saw that article in its original fashion. The assumptions and budget numbers used were insane. Few of them were anything akin to a “middle class” lifestyle. One that I remember off the top of my head was “three vacations per year; two destinations and one stay-cation.” There was also the $1.8 million home (that made me laugh), the $70 per day in food (my father fed a family of 5 for $100 a week, and we ate very well), and a bunch of other crazy assumptions. Not a good article. It kind of gave off a out-of-touch-with-the-middle-class vibe.
You give me that same income and I can live quite well. There are lots of expenses that can be drastically cut.
robc
Oct 21 2019 at 4:39pm
I remember seeing that too. There were a number of ridiculous categories for “middle class”.
Housing is what it is, but the rest of the budget was not remotely middle class.
Todd Kreider
Oct 22 2019 at 5:59am
Assuming there isn’t a nuclear war, 25 year olds today who live to 40 will have a far higher standard of living than older baby boomers did at their age in coming decades. A 25 year old today will be 50 in 2045 with health so good that they will never face the aches and serious ailments that often begin at around 50 today, and they will also have enhancements. Their lives as 75 year olds in 2070 will be radically different than what 75 year olds experience today.
Craig
Oct 21 2019 at 5:36pm
Back in 1994 I worked in Manhattan and I saved more actually. My secret? I lived with my parents in NJ. I’d net $600 +/- and I’d deposit $500 into the HSBC Bank on 46th and 6th, no ATM card…so that I COULDN’T get to it back in NJ. I brought $2 per day Monday-Thursday and a PBJ sandwich which cost $.35 to make. On Friday my treat was my favorite pizzeria, Little Italy Pizza on 45th. I still spent less than $5. I’d bring a can of Diet Coke. Place I worked out would give fare if you had to go more than 15 blocks. If it were 15+, I’d take the fare and still walk. I’d come home, eat my mom’s dinner, go to the gym which was my $20/month social life and I’d come home and work on my business until 1-2am, rinse, repeat for another starlit journey into Manhattan. Friday, I’d come home and crash and sleep the sleep. But I absolutely worked on my business over the weekend as well. I even saved off of my $100/wk spending budget and that’s how I bought my wife an engagement ring on 47th Street.
David Henderson
Oct 22 2019 at 9:54am
Great story! Thanks.
Robert Schadler
Oct 21 2019 at 12:45pm
Juxtapose this discussion with, apparently, a large segment of American society that is unprepared for an unexpected $400. expense. As a child of impoverished immigrants, I can’t wrap my head around some employed who can’t save hundreds of dollars. And I’m inclined to think even panhandlers can do it.
And, yes, housing is a big part of it. In my case, as a grad student at Penn and working for the Intercollegiate Studies Institute (a pinnacle of a low payer), I scraped enough for a down payment for a big, old house, then rented out rooms in the house to fellow grad students, and ended up living “rent” free. Pivotal but hardly an act of great intelligence. Suspect semi-literate peasants have done much the same in one way or another.
It’s an advantage of living in a wealthy country. And a reason why a lot of poor people, in many different countries, want to come here.
Matthias Görgens
Oct 22 2019 at 12:26am
That study with the 400 dollars has been misrepresented.
David Henderson
Oct 22 2019 at 9:58am
Yes, it has.
I posted on it earlier this year.
Comments are closed.